Getting out from under Ontario’s high electricity rates

Premier Doug Ford's new government should cancel existing renewable energy contracts, not just future deals

By Elmira Aliakbariand Ashley StedmanThe Fraser Institute

If its recent throne speech is any indication, Ontario’s new government wants to reverse past mistakes and reduce electricity prices for Ontarians by cancelling 758 expensive green energy contracts with renewable generators for sources such as wind and solar.

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According to the government’s press release, this move “will save $790 million to help lower electricity bills.”

But is that true? Will cancelling these contracts reduce electricity prices for Ontarians?

To answer that question, it’s important to understand how we got here.

Ontario’s energy policy shift began around 2005 when the provincial government decided to phase out coal. The next major step occurred in 2009 when the government launched its Green Energy Act with its “feed-in-tariff” program, which provides long-term guaranteed contracts to generators with renewable energy sources at a fixed price above market rates. Generators with renewable sources received a fixed price without being subject to competition in the market. In fact, some of these generators were paid not for generating electricity but for having generating capacity available on-call. To fund these commitments, and the cost of conservation programs, Ontario levied a surcharge on electricity called the Global Adjustment (GA).

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The result?

A 2015 report by Ontario’s auditor general concluded that the 20-year guaranteed-price contracts caused Ontarians to pay $9.2 billion more than they would have for electricity under the province’s previous program.

Not surprisingly, experts criticized Ontario’s previous governments for signing these contracts with renewable generators and called for these contracts to be cancelled, while others suggest that legalities could prevent the province from cancelling.

However, legal scholar and Queen’s University law professor Bruce Pardy found in 2014 that legislatures are, in fact, able to cancel contracts by enacting legislation. More specifically, he said the right way to terminate the contracts is “to enact a statute that declares green contracts to be null and void, and the province to be free from liability.”

But what about potential compensation for renewable generators who signed contracts with the province?

According to Pardy, “the compensation clauses in the contract[s] will be rendered inoperative if the statute says so.”

And that brings us back to the recent actions of Premier Doug Ford’s new government.

To be clear, cancelling the contracts is good news for Ontarians, as it will help prevent future price increases.

But it likely won’t reduce electricity prices anytime soon. All of the 758 cancelled renewable projects were in the early stages, meaning they had not reached specific milestones or received notice from the government to proceed, which means the government hasn’t actually paid these companies for the cancelled projects. Therefore, terminating these contracts will only affect future electricity costs.

To fix existing cost problems and reduce today’s high electricity prices for Ontarians, the government must reduce the current GA surcharge on electricity. To do this, it must cancel existing contracts with renewable generators under the Green Energy Act’s feed-in-tariff program.

But simply cancelling the green contracts may result in huge compensation costs for renewable generators from a government already deeply in debt. To mitigate compensation costs, which would be borne by taxpayers, the new government could enact legislation to cancel the contracts.

Ontarians have suffered from the province’s electricity crisis for years and may finally receive some relief. The government of Ontario should use its legislative powers to nullify both future and existing contracts to reduce the artificially high electricity rates that hurt individual Ontarians and the province’s overall economy.

Elmira Aliakbari is associate director of Natural Resource Studies, and Ashley Stedman is a senior policy analyst, at the Fraser Institute.